Questions and Answers
What is the primary focus of risk management?
Which of the following best describes portfolio management?
What is one use of marginal VaR in portfolio management?
Which of the following is NOT a type of risk typically distinguished in investment management?
Signup and view all the answers
What does risk budgeting primarily involve?
Signup and view all the answers
How does the turnover affect the risk management process?
Signup and view all the answers
What is the main objective of performance measurement tools in investment management?
Signup and view all the answers
Which dimension is NOT fundamental to risk management?
Signup and view all the answers
Which investor type is an exception to the assumption that all investors hold the mean-variance efficient portfolio according to the CAPM?
Signup and view all the answers
Which of the following best describes a factor according to the context provided?
Signup and view all the answers
What characteristic do assets that have losses during periods of low market returns typically have?
Signup and view all the answers
How does the expected payoff of an asset in bad times affect its expected return?
Signup and view all the answers
Which statement least likely describes a limitation of the capital asset pricing model (CAPM)?
Signup and view all the answers
What is generally believed about institutional investors in market contexts?
Signup and view all the answers
What is a common misconception regarding information in financial markets?
Signup and view all the answers
Which of the following statements is true regarding market behavior?
Signup and view all the answers
What does the APT model primarily focus on in relation to asset pricing?
Signup and view all the answers
Which theory posits that active managers help make markets more efficient?
Signup and view all the answers
What is a key assumption of the Efficient Market Hypothesis?
Signup and view all the answers
Which area is least likely to be exploited by active managers according to market efficiency theories?
Signup and view all the answers
What do behavioral biases in trading typically lead to?
Signup and view all the answers
According to the APT model, what do investors require for bearing systematic risk?
Signup and view all the answers
In the rational explanation of behavioral finance, what compensates for losses during bad times?
Signup and view all the answers
What effect do transaction, financing, and agency costs have in the refined EMH?
Signup and view all the answers
What is one significant risk associated with momentum investing?
Signup and view all the answers
What can lead to an upward drift in stock prices according to behavioral explanations?
Signup and view all the answers
Which of the following explains the rationale behind momentum investing?
Signup and view all the answers
Which investor behavior is associated with overreaction in momentum investing?
Signup and view all the answers
What should an investor consider when engaging in momentum investing?
Signup and view all the answers
What is a key assumption of the Capital Asset Pricing Model (CAPM)?
Signup and view all the answers
What typically happens during 'crash' periods in momentum investing?
Signup and view all the answers
Which type of risk is NOT directly related to momentum investing?
Signup and view all the answers
Which of the following is NOT one of the lessons from multifactor models?
Signup and view all the answers
Which strategy is most likely to stabilize asset prices?
Signup and view all the answers
What does the stochastic discount factor (SDF) represent?
Signup and view all the answers
Which of the following concepts relates to Arbitrage Pricing Theory (APT)?
Signup and view all the answers
How is risk measured in multifactor models?
Signup and view all the answers
What does the efficient market hypothesis (EMH) imply about active management?
Signup and view all the answers
According to multifactor models, what is true about valuable assets?
Signup and view all the answers
Which of the following statements about market efficiency is accurate?
Signup and view all the answers
Study Notes
Risk Management vs. Portfolio Management
- Risk management involves identifying, assessing, and prioritizing risks to minimize impacts on investments.
- Portfolio management focuses on selecting and managing a collection of assets to achieve specific investment goals.
- Both management types are critical in ensuring financial objectives are met while managing threats to those objectives.
Marginal VaR in Portfolio Management
- Marginal VaR (Value at Risk) measures the impact on the overall portfolio risk when adding an additional asset.
- It aids in decision-making by identifying assets contributing to total portfolio risk.
- This helps optimize asset allocation, ensuring that each investment aligns with risk tolerance and return expectations.
Risk Budgeting in Investment Management
- Risk budgeting defines how much risk to allocate to different investments based on their potential returns and volatility.
- It allows fund managers to determine the expected performance per unit of risk across various asset classes.
- Large investors, such as pension funds, use risk budgeting to align investment strategies with risk tolerance and capital needs.
Horizon, Turnover, and Leverage in Risk Management
- Investment horizon affects risk exposure; longer horizons may accept greater risks for potential returns.
- High turnover in a portfolio can increase transaction costs and create volatility, impacting risk profiles.
- Leverage amplifies potential returns and risks, requiring careful management to avoid significant losses in adverse market conditions.
Types of Risks in Investment Management
- Absolute risk measures the total risk of a portfolio without comparison to a benchmark.
- Relative risk assesses risk in relation to a benchmark portfolio.
- Policy-mix risk arises from changes in a fund’s investment strategy or asset allocation.
- Active management risk reflects the potential underperformance of active strategies versus passive benchmarks.
- Funding risk deals with the possibility of insufficient cash flow to meet obligations.
- Sponsor risk is the risk associated with the financial stability and decisions of the sponsoring organization.
VaR as a Risk Monitoring Tool
- VaR quantifies the maximum expected loss within a specified confidence level over a set time.
- It helps ensure compliance with investment strategies and risk limits established by management.
- Portfolio managers can leverage VaR in rule development to manage risk more effectively.
Risk Monitoring's Role in Investment Management
- Risk monitoring involves ongoing assessment of risks to ensure that investment activities align with established goals.
- It confirms adherence to investment strategies and identifies deviations from expected outcomes.
- Effective risk monitoring contributes to an internal control environment, promoting consistency in investment practices.
Performance Measurement Tools
- Performance measurement tools evaluate the success of investment strategies against benchmarks and peer groups.
- Alpha measures an investment's excess return relative to a benchmark.
- Using benchmarks allows comparisons to gauge relative performance and identify strengths or weaknesses in the investment process.
Market Efficiency and Behavioral Biases
- The Efficient Market Hypothesis (EMH) argues that security prices fully reflect all available information.
- Behavioral biases challenge EMH, indicating that investor psychology can distort market prices and trends.
- Understanding behavioral biases is crucial in identifying market inefficiencies that can be exploited.
Momentum Investing and Risks
- Momentum investing capitalizes on trends by buying assets that have shown upward price movement.
- Risks include exposure to market corrections during periods of high volatility and crashes driven by external factors.
- Investors must balance the potential for gains against the risk of significant losses during downturns.
Shortcomings of the Capital Asset Pricing Model (CAPM)
- CAPM assumptions include homogeneous expectations and frictionless markets, which may not reflect real-world conditions.
- The model does not account for investor behavior, such as overreaction or underreaction to market events.
- It may also overlook transaction costs and taxes that affect real investment returns.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
This quiz explores the critical differences between risk management and portfolio management, focusing on key concepts such as marginal VaR (Value-at-Risk). You will also learn how to implement marginal VaR in effective portfolio management strategies. Additionally, topics like risk budgeting and its implications on investment management will be covered.
